DEAR BOB: We have learned so much about real estate overmany years from your articles. But now we need your advice. I am 72. My wife is65. We have $160,000 in three-month T-bills. Should we use that money to payoff our approximately $100,000 mortgage at 5.7 percent interest with 28 yearsremaining at a $560 monthly payment? –Vinh H.
DEAR VINH: You have an excellent fixed mortgage interestrate. The only reason to pay it off early, presuming there is no prepaymentpenalty, is because you have more than enough cash than you will ever need.
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If you are retired and the $160,000 is a major portion ofyour retirement liquid cash, I suggest you do not pay off your superb mortgage.Re-borrowing in case of an emergency or investment opportunity could be verydifficult or impossible if you have limited retirement income.
Considering your small $560 “petty cash” monthlymortgage payment, which approximately equals your 5 percent earnings on your$160,000, please don’t pay off your beautiful mortgage unless you have too muchcash burning a hole in your pocket.
Just in case you foolishly disregard this advice and pay offthat great loan, please do me a favor and immediately obtain a home equity lineof credit (HELOC) at your bank or credit union for the maximum available(usually 75 percent of home market value). There is no cost until you write acheck to borrow on your HELOC. The interest rate should be at the prime rate,or less. Then you will have easy access to cash for an emergency.
HOW TO AVOID TAX ON THE SALE OF A VACATION HOME
DEAR BOB: Over 20 years ago my wife and I bought an 11-acrevacation home in northern Michigan. We made several improvements and find thatif we sell our property we will have a large capital gain. If we sell thisproperty and reinvest the entire amount in another vacation property within ashort time, will we still have a tax liability? –Paul M.
DEAR PAUL: Yes. There are no tax shelter opportunities for asecond or vacation home that is not your principal residence.
The Internal Revenue Code 121 test is you must have ownedand occupied the property as your principal residence at least 24 of the 60months before its sale. Then you can qualify for up to $500,000 principalresidence sale tax-free profits for a married couple filing jointly (up to$250,000 for a single home seller).
Your part-time second or vacation home cannot qualify forthe Internal Revenue Code 1031 tax-deferred exchange rules unless both your oldand new properties are rental or business properties. Because your vacationhome is not rented to tenants, it can’t qualify for a tax-deferred exchange.For more details, please consult your tax adviser.
HUGE DIFFERENCE BETWEEN SEWER AND SEPTIC TANK
DEAR BOB: We recently purchased a home and learned aftermoving in it has a septic tank. The cost to clean it out is approximately$1,500. The buyer’s agent accepted the verbal representation from the seller’slisting agent that the home was on a public sewer system. On their disclosurestatement, the sellers checked the box for “sewer system.” However,the MLS (multiple listing service) listing says there is a septic tank. Thesellers now say they did not know there was a septic tank. Do you think thesellers are liable for misrepresentation damages? –Warner S.
DEAR WARNER: Yes. Virtually every homeowner knows if theirresidence is connected to a public sewer system or if it has a private septictank, which must be pumped every year or two. That is a huge difference thataffects the market value and desirability of a property.
If there is a public sewer to which the house can beconnected, the sellers should be liable for the cost of making that connection.For full details, please consult a local real estate attorney.
DISHONEST MORTGAGE BROKER HAS BORROWER TIED UP
DEAR BOB: I am a first-time home buyer who is having troublewith my mortgage broker. With only two weeks left until the scheduled closingdate, she just submitted my loan application to a lender. Although she assuredme there would be no loan origination points, I finally received her good faithestimate of loan costs, which includes a loan fee of $8,369. She is getting akickback from the lender for $2,109, plus charging me a $495 processing fee. Ihave personally known this mortgage broker for many years. Is that $8,369 loanfee unreasonable? What recourse do I have? –Amadeo A.
DEAR AMADEO: Face the facts. You are dealing with a verydishonest mortgage broker who is swindling you by leaving you with virtually noother mortgage finance alternative if your home purchase is to close on time injust two weeks.
Within three business days of your submitting your completedloan application, your mortgage broker was required to provide you with awritten “good faith estimate” of your loan costs. Although she brokethat rule, unfortunately there is virtually no penalty for her.
She is setting you up for a “take it or leave it”closing situation. Not only is she being very well compensated by that $2,109″yield spread premium” paid to her by the lender for charging you ahigher-than-market interest rate, but then she is asking you to pay anunexpected $8,369 loan fee for her horrible service to you.
Unfortunately, with the closing date fast approaching, youprobably don’t have time to obtain a mortgage from another lender unless yourseller will give you a written extension of your closing date.
It’s worth a try to negotiate with your dishonest mortgagebroker to eliminate or reduce that outrageous unexpected $8,369 she wants tocharge you. Thankfully, bad mortgage brokers like yours are the exceptionrather than the rule.
TWO HOUSES ON ONE LOT IS REALLY A DOUBLE SALE
DEAR BOB: We live on a property that has a three-bedroomhouse and a two-bedroom cottage. Each house has its own street address. Butthere is one tax assessor’s parcel number. To maximize our profit, we arethinking of selling the two houses as tenants in common. Can my husband and Iqualify for that home sale tax exclusion of $500,000 when we sell our property?–Lee L.
DEAR LEE: You are making two separate sales. One is the saleof the home where you reside as your principal residence. The other is therental unit sale.
My best advice is to forget your idea of attempting to sellto two buyers as tenants in common. That will greatly complicate the mortgagefinancing and discourage many prospective buyers. Instead, sell to one buyer asa two-unit property with an “owner’s residence.”
If you have owned and occupied one of the units as yourprincipal residence at least 24 of the 60 months before its sale, you qualifyfor the Internal Revenue Code 121 tax exemption up to $500,000 if you file ajoint tax return in the year of sale.
However, your profit from the sale of the rental unit willbe subject to capital gains tax. Or, you can make an Internal Revenue Code 1031tax-deferred exchange for your profit on the sale of that unit. To allocate thesales price between the two units, please consult your tax adviser.
CONFUSION ABOUT TAX-DEFERRED TRADES AND PERSONAL RESIDENCES
DEAR BOB: I took advantage of Internal Revenue Code 1031 tomake a tax-deferred exchange to acquire a historic home as an investmentproperty. I have owned it six years and plan to convert it back into mypersonal residence to live in for two years before selling. However, I was toldthat because I used IRC 1031 to acquire the property, I cannot use InternalRevenue Code 121 to claim the $250,000 or $500,000 principal residence sale taxexemption. Is this true? –Dan McF.
DEAR DAN: No. You received incorrect tax advice. Because youused IRC 1031 to acquire the investment property in a tax-deferred exchange,IRC 121 now requires you to own the property at least 60 months before becomingeligible for the $250,000 (single) or $500,000 (married) principal-residencetax exemption.
Of course, you must occupy the principal residence at least24 of the 60 months before the sale. However, the depreciation you deductedduring the rental period will be “recaptured” and taxed at thespecial 25 percent tax rate. For full details, please consult your tax adviser.
The new Robert Bruss special report, “Probate PropertyProfit Secrets Revealed,” is now available for $5 from Robert Bruss, 251Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instantInternet delivery at www.BobBruss.com.Questions for this column are welcome at either address.
(For more information on Bob Bruss publications, visit his
Real Estate Center).
Copyright 2006 Inman News